Annual Report Netflix

Annual Report
Netflix, Inc.
Don Vu
ACG2021.001

Executive Summary
• Netflix, Inc. is a popular subscription service that provides streaming movies and
TV shows over the Internet and delivers DVD rentals. It is one of frontrunners for
streaming entertainment because of its large library content.
• The business has been through a rough patch lately when it lost an estimated one
million subscribers after they increased the price of DVD rentals and Internet
streaming services and separated their services into two websites. After Netflix’s
announcement of the change, their stock prices tumbled to about one-third of the
original price .
• With the new pricing plan and reorganization, the company hopes to develop each
of their services better, such as expanding their libraries. They also began reaching
out to international markets such as Canada, Mexico, the Caribbean, Central
America, and South America. They plan to expand to rest of the world in the
future.
• 2010 Annual Report and Financial Statements

• Chief Executive Officer:
Reed Hastings
• Home Office Location:
100 Winchester Circle
Los Gatos, California, USA 95032
• Ending Date of Latest Fiscal Year:
December 31, 2010
Introduction
• Subscription service for streaming TV shows and movies over the internet, and for
DVD/Blu-Ray rentals through mail delivery. The streaming service is supported on
many devices.
• Provides service to USA and Canada. Slowly expanding to Mexico, the Caribbean,
Central America, and South America.

Audit Report
• Financial statements were audited by KPMG LLP.
• KPMG LLP concluded that the presentation of the financial statements was
fair and are in accordance to US generally accepted accounting principles.
They also wrote that the internal control of Netflix, Inc. was effective over
financial reporting. This was based on criteria set by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal Control-
Integrated Framework.

Stock Market Information
• Price of Netflix Inc.’s stock as of
October 6, 2011 at 4:00 PM ET:
$123.24
• 52-Week Low: $107.63
• 52-Week High: $304.79
• Dividend per share: $0.00
(Netflix, Inc. has not declared
any dividends yet.)
• While the price is still high, it
has been decreasing rapidly
since the announcement of the
subscription price hike. I would
recommend stockholders to sell
and potential buyers not to buy.
July 2010-October 2011

Industry Situation and Company Plans
• Netflix, Inc. is one of leading services in providing TV shows and movies
instantly through Internet streaming. Entertainment through Internet
streaming is a relatively new market, which is highly competitive and
changing constantly. This emerging market will slowly replace DVD rentals
(also a part of Netflix’s business). Streaming over the Internet will become
a primary provider of entertainment as consumers are more reliant on
computers and devices that have Internet connection. Also Internet
streaming is convenient and easy for the consumer.
• Netflix has split up their Internet streaming and DVD rental services into
two separate companies. Netflix will provide streaming content while a
new subsidiary, Qwikster, will provide DVD and video game rentals
through mail. This resulted a 60% price hike for customers who originally
had both services. Netflix, Inc. stated that they separated the services in
order to focus on improving each of the services separately like obtaining
new content.

Industry Situation and Company Plans
• Netflix, Inc. has an expansion plan to all the other countries in the
Americas besides USA and Canada. The business plans to expand to
foreign markets overseas in the future.
• Source 1, Source 2, Source 3

Income Statement
• Netflix, Inc. uses multistep format.
Year Gross Profit Income from
Operations
Net Income
2010 805,270,000 283,641,000 160,853,000
2009 590,998,000 191,939,000 115,860,000
Difference 214,272,000 91,702,000 44,993,000
• Gross profit, income from operations, and net income all increased from
2009 to 2010.
• There were more revenues in 2010 than in 2009, resulting in an increase
in gross profit.
• Although cost of revenues and operating expenses grew in 2010, income
from operations still increased because of the increase in revenue.
• Income taxes and interest expenses also increased but net income still
grew because of more revenue in 2010.

Balance Sheet
Year Assets = Liabilities + Stockholders’ Equity
2010 982,067,000 691,903,000 290,164,000
2009 679,734,000 480,591,000 199,143,000
Difference 302,333,000 211,312,000 91,021,000
•Assets, liabilities, and stockholders’ equity all increased from 2009 to 2010.
•Assets had the greatest change within the two years. An increase in assets
means that Netflix is growing in business.
•Liabilities increased but it is not a big concern since the company borrowed
more money to achieve more growth and increase in assets.
•Stockholders’ equity also increased because more people are investing in
Netflix, Inc. The new investors recognize that the business is growing.

Statement of Cash Flows
Year Net Income Cash Flow from Operations
2010 160,853,000 276,401,000
2009 115,860,000 325,063,000
•Cash flow from operations was more than net income in the previous two
years.
•The company is growing as it is investing in acquiring more DVD content for
its current library. Netflix, Inc. also invested in equipment and property, and
acquisition of intangible assets.
•In 2010, the primary source of financing was tax benefits from stock-based
compensation, and in 2009, it was proceeds from issuance of debt and net of
issuance costs.
•Cash has increased from $134,224,000 (2009) to $194,499,000 (2010).

Accounting Policies
• Revenue Recognition- The business recognizes revenue ratably from monthly
subscription periods. Refunds are revenue reductions. Unrecognized
subscriptions and unredeemed gift card subscriptions are counted as deferred
revenues.
• Cash Equivalents and Short-term Investments- Investments in instruments
purchased with an original maturity of 90 days or less are considered cash
equivalents. Marketable securities with original maturities more than 90 days are
considered short-term investments.
• Content Library- Netflix’s content was obtained through DVD purchases and
licensing deals for streaming. Streaming content is amortized over their period of
availability. Licensing fees for titles that are due within a year but not paid yet are
classified as “Accounts payable.” The portion due beyond a year is classified as
“Other non-current liabilities.”
• Property and Equipment- These are carried at cost minus accumulated
depreciation. Leased buildings are capitalized and included when it did not meet
the sale-leaseback criteria.

Accounting Policies
Topics of the notes to financial statements
•Organization and Summary of Significant Accounting Policies
•Short-term Investments
•Balance Sheet Components
•Long-term Debt
•Commitments and Contingencies
•Guarantees-Intellectual Property Indemnification Obligations
•Stockholders' Equity
•Income Taxes
•Employee Benefit Plan
•Related Party Transaction
•Selected Quarterly Financial Data (Unaudited)

Financial Analysis- Liquidity Ratios
Year 2010 2009 Comment
Working Capital 252,388,000 183,577,000 The increase in working capital indicates that the
company can invest more to increase growth.
Current Ratio 1.65 1.81 The current ratio went lower slightly. This means that
Netflix, Inc. has more current liabilities in 2010.
Receivable
Turnover
Average Days’
Sales Uncollected
Inventory
Turnover
Average Days’
Inventory on Hand
N/A N/A As a subscription service, Netflix, Inc. has no accounts
receivable because subscribers prepay for content. It is
paid off by the time Netflix, Inc. earns the revenue. The
average accounts receivable is not available. Thus,
receivable turnover cannot be determined.
N/A N/A Since receivable turnover cannot be calculated, average
days’ sales uncollected cannot be determined.
9.37 times 10.41 times Netflix has a content library of DVDs and streaming
content as inventory. DVDs are borrowed and returned
by the consumer, and streaming content is duplicated on
the consumer’s device. The number of times a consumer
accesses Netflix’s contents during an accounting period
has decreased over time, probably due to Netflix’s
competitors.
38.96 days 35.06 days The average number of days that a consumer views
content on Netflix has grown by almost 4 days, as the
consumer has many sources of entertainment to choose
from.

Financial Analysis
Profitability Ratios
Year 2010 2009 Comment
Profit Margin 7.44% 6.94% Sales dollars contributed to net
income increased a small
amount from 2009 to 2010.
Asset Turnover 2.60 times 2.58 times The efficiency of turning assets
into sales has stayed mostly the
same.
Return on Assets 19.36% 17.89% There was a small increase in use
of assets to generate income.
Return on Equity 65.75% 42.42% The business earned more by
about 20% for each dollar
invested by stockholders.

Financial Analysis
Solvency Ratio
Year 2010 2009 Comment
Debt to Equity 238.45% 241.33% The ratio stayed about the same within
the two years. The creditors have
more say than investors do in the
company.

Financial Analysis
Market Strength Ratios
Year 2010 2009 Comment
Price/Earnings per
Share
59.36 times 27.82 times The ratio doubled from 2009 to
2010. Investors expect Netflix, Inc.
to continue its success.
Dividend Yield 0.00% 0.00% Dividends per share is $0.00, which
would make dividend yield equal to
0%.